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Edited Transcript of TCG.L earnings conference call or presentation 16-May-19 8:00am GMT

Half Year 2019 Thomas Cook Group plc Earnings Call

Peterborough Jun 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Thomas Cook Group plc earnings conference call or presentation Thursday, May 16, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Fankhauser

Thomas Cook Group plc - CEO & Executive Director

* Sten Daugaard

Thomas Cook Group plc - Group CFO & Executive Director

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Conference Call Participants

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* Alex Brignall

Redburn (Europe) Limited, Research Division - Research Analyst

* Cristian Nedelcu

UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst

* Jamie David William Rollo

Morgan Stanley, Research Division - MD

* Kathryn Helena Louise Leonard

Numis Securities Limited, Research Division - Analyst

* Mark Paul Irvine-Fortescue

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Stuart John Gordon

Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst and Head of Business Services, Leisure & Transport,

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Presentation

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [1]

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Good morning, ladies and gentlemen. Welcome to our results presentation for first half year 2019.

Before we talk you through the details, I want to just give you an overview of the format of this meeting. I start with the overview. Then Sten will talk you through the figures. And then I come back about the strategic growth process which covers what we are doing to manage the challenging environment this year, but as well, what are we going to do in the mid-term, long term with the business and then we are summarizing and open up for questions and answers.

Our performance for the first half year has been impacted by a uncertain customer and consumer environment across all our major source markets. Despite that environment, we could keep the revenue in line with last year with strong growth in Turkey and North Africa. However, the seasonal loss increased against a strong comparator of 2018 first half.

What we have to do as well, and that is a good progress, we have not to lose our focus on the customers and we have, again, improvement in net promoter score -- leading by the net promoter score in the hotels by 6 points which is promising to look forward that we are as well really doing the right things for the customers. And what we have also made big progress and where we have really a good swing is in our development of -- building a new hotel and resorts company which is leading in the sun and beach business in Europe.

We have opened 12 new hotels in the first half year and we have doubled the hotel fund, which we just launched 12 months ago. We have doubled the size of that. And as you have seen from our announcement this morning, we have as well agreed the term sheet for a new banking facility, which gives us sufficient headroom for next winter.

What is clear is now that we really took the right step in February to launch a strategic review of our Group Airline. In this environment, it's even more important that we take proactive steps to deleverage our balance sheet. And we have really built a strong European leisure airline with our team and we are proud what we have built with our Group Airline and that is now as well reflected in the interest what we have seen, and with the bids which came in for the airline -- for parts of and for the whole airline, we received multiple bids, and we are currently assessing all those bids and considering all options to increase the shareholder value.

And of course, we can't say much about the details of it but it is -- we are really confident with the progress we are making there. And we will update you in due course.

And now I hand over to Sten for the financial results and the current trading.

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [2]

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Thank you, Peter. So, good morning, ladies and gentlemen from me also.

Revenues for the first half basically flat compared with the year before, GBP 3.019 billion. Gross profit, based on the development in the industry, under pressure. Competitive situation in the market leads to discounting and lower prices -- maybe also too much capacity in the market, leads to unattractive pricing.

Costs have gone up. Input costs have increased. Hotel prices are increasing also in the attractive markets. Fuel costs are up. We cannot compensate that fully on the sale side, therefore a margin drop of about 180 basis points on a like-for-like basis with last year.

Which leads to an underlying EBIT of minus GBP 245 million, which is GBP 76 million off our performance in the first half of 2018.

SDIs are better, as promised. You might not be impressed by the size here, but keep in mind that the big increase in SDIs came in the second half of '18, so the comparison in the second half will be the same and we are not changing our former guidance as to SDIs for this year. We are going to keep within what we have been saying so far, which leads to a loss from operation of minus GBP 282 million, which is GBP 68 million worse than last year, before goodwill impairment.

And most of you are probably not surprised with the goodwill impairment. It is all related to the U.K. tour operator. You probably remember from our annual closing 2018, where you could read the assumptions that were made for defending the goodwill that was in the book at that point in time. We have of course revisited that in the half year because of the change in the trading situation for the U.K. business and came to the conclusion that we could not defend the goodwill on the books for the U.K. tour operator, and that's why we are taking a full write-down. So on the U.K., there is no goodwill lift in the books.

We still have [in all] GBP 1.5 billion of goodwill, which is related to airline and the European tour operator business. But the headroom there is more than comfortable. So I do not expect to be able to -- I don't expect it to be necessary to repeat this going forward. That leads to a loss from operation for the first half after goodwill of GBP 1.386 billion.

The revenue bridge, as you can see here, on a like-for-like basis GBP 3.16 billion (sic) [GBP 3.019 billion]. IFRS 15 accounting change is a major change in the like-for-like comparison. There is, in the RNS, a detailed description of what that is and where that is coming from. So I don't want to bore you with these accounting details here.

North America (sic) [North Africa] and Turkey are still performing better, giving us additional revenue, but it's all lost in Spain. Mainland Spain and the islands are still not performing comparable to last year's. Other short haul business is positive with GBP 52 million, and the long haul in the first half was down by GBP 34 million, leading to the GBP 3.019 billion that I mentioned before.

The gross margin bridge. All markets are unfortunately contributing to a decline in gross margin: 0.7 basis points (sic) [0.7%] from the U.K. tour operator; 0.4% from the Continental Europe tour operator; and 0.8% from the Nordic tour operator; the airline, a small positive of 0.1%, which leads to a reported gross margin in the first half of 19.8%.

If you want to see it by products, we have it here; it's also in the presentation that you have. That -- branded has been able to keep its pricing in this difficult market environment; selected, down by GBP 17 million; complimentary, GBP 21 million; and all else, GBP 15 million, which leads to the GBP 499 million (sic) [GBP 599 million] that you saw in the table at the beginning of the presentation.

The underlying EBIT bridge also reflects that development. U.K. business is down on EBIT. This is a gross reduction of GBP 22 million; Continental Europe of GBP 31 million; and GBP 32 million in Nordics. The growth is because we are taking measures also on the cost side. So there is a GBP 16 million counter position here basically in cost savings in the U.K. organization or in the tour operator organization in general and GBP 8 million in corporate; airline, GBP 2 million, which leads to the minus GBP 245 million.

The SDIs. You remember I have had discussions with you on that item several times. I would say that we have gotten this under full control in the company. We have installed a completely different discipline on how this works and what is approved as SDIs, what is documented as SDIs. And therefore, we have a decline in SDIs in the first half compared with last year, and that is going to continue for the rest of the year so that we will stay within what we have said about SDIs for the full year in the past.

Group cash flow is of course negatively impacted about the development in the business, mainly a reduction of GBP 137 million in the working capital. It is mainly contributed to the change in revenue from advance payments for trips. We have lesser payments that has an impact. We have some positive other movements in the working capital, but it leads to a decline in working capital of GBP 137 million, which means that the free cash flow for the first half year is down by GBP 121 million to a total of GBP 839 million negative.

The net debt is of course also impacted by this development. Opening net debt was GBP 389 million and we are closing net debt at the end of March by GBP 1.247 billion, which is GBP 360 million off where it was a year earlier.

Trading outlook for the summer '19. Bookings are, in the tour operator, down 12%, which is in line with the capacity reductions that we have installed throughout the last part of the winter and also bringing it further into the summer. As I mentioned before, still strong demand for Turkey, Egypt and Greece has come back. Weak trading in the U.K. markets and Nordics in particular; that is unfortunately unchanged. Airlines bookings are up 9%, excluding our own tour operator -- after our own tour operator. Because of the capacity reduction, bookings are down 6% on the airline, but they work hard on compensating that with acquiring third-party tour operators and of course through seat-only sales.

The outlook therefore is built on a continued weak consumer confidence in general. Highly promotional market with overcapacities and very competitive pricing, which means that we cannot push through cost of sales increases that we have seen in the system which puts a squeeze on the margin, and therefore we are expecting an underlying EBIT for the second half that is behind the same period last year. Just to remember, the EBIT in the second half of last year was GBP 426 million.

We have, as Peter mentioned in his brief introduction, we have secured an additional financing. This is also mentioned here in the right sequence. We started out with a strategic review, as you remember, when we announced our first quarter result back in early February. At that point in time, we were not in discussions about an additional financing facility. But, based on the forecasting that we developed on the business at that point in time, we felt that it would be better to secure an additional financing for the coming winter season to make sure that we have the headroom that we like to operate with and therefore we were able to secure another GBP 300 million of financing if it is needed in the winter months.

It's not anything we need to draw on at this point in time because the business and the cash flow is -- the business is generating cash flow. That's why we have agreed on availability as of October '19 and based on the normal business cycle that would be repaid by June '20 or even earlier if there is the expected progress on the strategic review that Peter also mentioned before.

We have, in this connection, and because of the weaker business that we are seeing compared with at the point in time where we did the original financing facility back in 2017 which was built on a different business plan than the one we are working on now, we have also agreed a reset of the covenants until the maturity of the facility in the year 2022. So we don't need to discuss where are you on covenants every quarter that we are talking to you.

Peter, I'll hand back to you.

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [3]

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Thank you, Sten.

In this difficult environment, we really have to take the lessons from 2018 and we have to focus on those things what we can really control. And this is exactly what we did and we proactively did that at the very early stage in the cycle by trimming the capacity, especially here in the U.K., to reduce the operational risk what we are facing and to concentrate more on margins than on volume, and to have less to sell than in the late market.

We introduced as well very, very strict cost control -- strict cost and cash control, and when I mean strict, and I really mean strict, that we are really reassessing every expense in the whole business to mitigate further margin declines. And we refocused the whole organization on those projects which are giving us the biggest lever into the future and we were just really stripping back all the other projects which have as well an impact but more -- less an immediate and less -- a smaller one.

And as I said, we launched the strategic review of the airline and I would say really just right at the beginning of the year, and that was the right step to take to deleverage the balance sheet and to reduce our debts. And we, as Sten just mentioned, we agreed the terms for a new bank facility with our lending banks and we have the support from our banking group.

It's easy in such a situation to forget what we have to focus as well, and this is where we have to focus, what we have to focus and not forget, is the customer. And we launched a holiday report. We launched a survey with 30,000 of our customers to really assess whether we are doing the right things and whether we are doing the right things as well for the future. And I want to -- I don't go through all of the slides. I just want to point out 1 or 2 elements of it.

And one of the most important ones is -- I am very often asked, whether we are somehow a run-out model, a run-out business model and we are not attractive for the new customers, for the millennials, 18 to 35 years old age group. And this is absolutely not the case. We have 5x more customers than 5 years ago in this age group. And 25% of our customers are exactly in this age group. And we have as well [feedback] from these customers. 48% of those customers, they prefer to go with a tour operator. So that means, if you have the right product and you have the right channels to attract and to reach out to these customers, you have a (inaudible) of new customers which are coming to us. And we see it in our Cook's Club, that 75% of the customers what we have in our new Cook's Club, same as in Casa Cook, are new to Thomas Cook.

And what is as well interesting to see is that more and more, it is really the content, the offer what the hotel has to give to our customers in terms of food which is important and this is as well, again, bang on with our concepts on the hotel side. And that we then combine all those new concepts as well with the local community, whether this is local food, whether this is local interaction, that is exactly what the new customers want to have from a tour operator, from a tour operator who is changing and adapting to the customer needs.

And just a sideline. What we have found out, and that was for me surprising, is that long haul trips are getting shorter and shorter. The short stay long haul trips are massively increasing and that's why our airline team launched this innovation of the sleeper seats, where you can sleep in a row, that you can, when you go for the short time, you can even in [Echo], you can really relax and sleep on the plane.

So what is important to see is out of this, we really focus on how do we differentiate Thomas Cook in a crowded market, in a competitive market, going further on and beyond this year, and this is exactly where we have the development of our own branded hotels. The vision is clear what we want to achieve there. The ambition is clear what we want to achieve there. We want to build one of Europe's leading sun and beach hotel business supported by a strong distribution channel with our own tour operators.

And not just a hotel business. We want to have a hotel business which is differentiated, which is bang-on on the customer needs, where we have a real traction as well for the tour operator in order that the tour operator can sell double the size of customers than they are selling today in our own branded hotels. And I have -- I disclosed this figure already. It is about 10%, 12% what we have, customers in our own branded hotels. We want to double, in the coming 3 years, those number of customers because we can differentiate our offering more, and we are, also as a tour operator, earning more with those hotels.

And on the hotels and resorts side, we want to grow to 250 hotels. But not just growing for the growth. We want to grow it into new concept, into attractive concept that we can charge as well more for the customers and earn more from our customers in this hotel portfolio. And one lever -- one big lever to earn more is if we are going to change the percentage from franchised -- management hotels -- today we have 15% managed hotels in our portfolio and 85% are franchised, and we are going to turn that into 30% managed hotels because in managed hotels, we get a bigger share of margin as well in our hotel business.

For that, we want to use the funds, the hotel investment funds, which we launched 12 months ago. We have doubled the size of the fund. We got the support of 2 banks -- 2 local banks, the CaixaBank in Spain and the Bank of Piraeus, who gave us EUR91 million to expand this hotel fund, and we are on the way to attract as well investors from outside into this fund because we have now a size or we can prove that we can really attract nice hotels into this fund and we have a target to grow that up in the 3 years to 15 hotels. Probably, it's even a modest target when we see the development what we have done already in the first 12 months.

We do an amazing job in the hotel and resort unit. We opened in the first half year12 hotels. We opened the Casa Cook in Chania. We opened Cook's Clubs, 4 of them, in Palma, in Alanya, in Marmaris and as well as in Kos. So we are really opening all those hotels and we have another 20 hotels in the pipeline for this year, and we have 60 hotels refurbished out of these 200 hotels -- additional 60 hotels refurbished for this summer to really drive NPS and to drive customer satisfaction.

The other area where we want to focus is really digital because we see as well that the young generation, they are going especially on mobile. And if you see what is the share of our mobile searches in our -- on our thomascook.com, 58% of all our searches are done via a mobile device. And this is where we want to really focus on that we have the usability on mobile really first-in-class. And you see here a research from Google Mobile that we are first in class tour operator. Before any other tour operator, we have the best usability as a tour operator here in the U.K. Some of our operators are even not on the chart.

And the third block is really efficiencies. And we made significant cash and cost savings across the group in the first half year. Sten mentioned that we accelerated the U.K. efficiency program by further closing 21 stores and as well reduced 300 store-based roles because we introduced a workforce management in the stores. We outsourced our call centers to South Africa -- the customer call center to South Africa. This is all done and is in operation. We reduced the head office costs quite massively and we saved as well costs in Condor by closing 2 of our stations -- of our operation stations in Berlin and Stuttgart.

And you see on this key performance indicator that the airline is really performing strong. Everything is principally up except the own tour operator, where we took the conscious decision to reduce the capacity and all the other KPIs are on an upswing. We have the fleet grown to 105 aircraft. We have now the first winter when we had the fleet exchange, the planes exchange with Air Transat. And what I mentioned as well, the innovation continues as well in the airline with the sleeper seats and we were even awarded in Nordics for the best TripAdvisor Travellers' Choice Award.

What I want to mention here as well, that is differentiating us as well to our competitors, we are growing very strongly outside of Europe. We are growing in Russia, which I mentioned already. That was really an opportunity in Russia to go in a joint venture to control and to get into our Russian operation, the biggest tour operator in Russia, Biblio Globus, and the benefit of that it is immediate because we have [with our in tourist] business where we have about 500,000 guests. We have an immediate better offer on the flight side. We can fly together with Biblio Globus, we can fly with Rossiya, which is a very well reputed airline for much more departure airports than we could have done that on a standalone basis, first of all. And we are opening up a new customer base for our own branded hotels in the Eastern Mediterranean.

And in China, we are well on the way to, again, massively grow the business. We will -- we are in a good way to double the business in China from last year's. Remember, we had 20,000; [160,000]. And we are confident that we are going to do -- that we're going to attract 320,000 customer this year. We expanded the presence in our destination management -- in our destinations, where we have the biggest growth in volume in Thailand in Japan, and we are as well -- we are as well expanding with our own branded hotels within China to get hotels for Chinese, Sunwing and Casa Cooks in the Chinese destination.

To summarize, our performance for the first 6 months comes against the strong comparator of last year. We have really strict cash and cost control in a difficult, in a challenging environment with declining consumer confidence. We make good progress on our strategic review to increase the financial flexibility. We have grown our own brand hotel business and this remains the key focus that we are really going in -- in the hotel business where we can retain more margin for our customers, but as well attracting more customers because we have the product development in our hand. And we have taken the right steps to secure the business for the future.

Thank you very much. Now I hand over for questions.

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Questions and Answers

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [1]

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Jamie?

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Jamie David William Rollo, Morgan Stanley, Research Division - MD [2]

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Jamie Rollo from Morgan Stanley. Three questions, please. First, I don't know whether you can separate out the second half performance downgrade between the airline and the tour operator. It looks like it's probably mostly tour operator, given the airline had a good first half. But where do that leave the remainco? Because it's not really making much profit in the tour operator, at least this year, and does that mean you are going to sell more bits of the tour operator in the future, maybe Nordics, maybe some of the businesses you talked about today? Secondly, the debt extension says it's subject to -- depend progress on executing the strategic review. So could you just say exactly what that means? Does that mean you have to sell the airline or just conclude the review? And then finally, a quick one: doubling of hotel profits. What were those own brand hotel profits last year, please?

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [3]

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Do you want me to take the 2 first one?

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [4]

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Yeah, the second one, yes.

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [5]

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You take the first one.

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [6]

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Yeah. I take the first one. The performance of the tour operator is clearly -- is clearly under pressure, and I don't want to hide. That's why we say with all what we see and with the uncertainty in the market, with the headwinds we see in the market, we say now that we are likely to come below the second half year of last year. Because when you pull all together and all scenarios -- and I have to say we have limited visibility. Remember, last July, we had even not a really good visibility -- for the last 3 months. So there is a lot of headwinds around. There is a lot of promotional activities around. There is the big question, how much capacity is still in the market and at what price this capacity is going to the customers. And that's why we say in this challenging environment, we assume that we are behind last year. We do all what we can to mitigate as much as possible. I am totally convinced that we took the right decision in the tour operator to take down capacity. It is as well for the airline. It's very difficult to predict the next 6 months because the airline sector is, as well, under pressure in terms of yields. And there we can't -- even if we are really a good airline, we can't just take us apart from the market. So that is what led to our statement that we are going to be behind last year in the second half year. Now, our focus is on the strategic review of the airline. And I hear all the rumors. If you have to say something else about, then we are going to tell you that first thing. But our review is strategic airline and to deleverage the balance sheet from a strategic airline view. Second?

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [7]

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Maybe to second, on Peter's answer, I think when you make a decision to do a strategic review on part of your business, of course you immediately start thinking about what you do with the remainco, what can that look like. So since we have decided on a strategy, we are working on plans for what the remainco should look like. But it's not something we are going to reveal until after we have finished our strategic review. But we have a plan in place that we believe that we can bring that into a better, profitable and cash generation situation, but that is for a later time. On your question, Jamie, on the date and the conditions connected to that -- when you -- I mentioned it before. The sequence is that we started a strategic review. The discussion about an additional credit line came up later in the year after we had made the decision on the strategic review. But you should not be surprised when you go to your banks and ask for an additional credit approval on top of your existing debt of at that point in time GBP 1.5 billion, that they will say, well, we don't just write you a check and do what you want. So that is a completely normal process that the bank will -- or the banks will look at how do you -- what do you do to achieve that. You might not even need it. The strategic review is one element in the process of maybe not even needing these funds. The funds are there to secure the headroom over the next winter, and anything coming out of the strategic review is of course helpful in that. But that's not a tick box that you have to have [finished] result of the strategic review to have access to the funds.

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [8]

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To your last question, own brand hotels. So double the size of the tour operator guests in those hotels has an impact on the tour operator, and if I say it's about 1 million, 1.2 million guests, what we have actually in these hotels, and we always said that margin for the tour operator is between 2% and 3% better in those own branded hotels, then you can calculate what would that mean then in a normal hotel, what would that mean on the operator side. Now, doubling the profits in our hotel unit, we don't disclose that yet, but we are on the way to set up really a P&L account as well for the hotels as we did that with the airline and then we can show you clean figures for the hotel unit, which is then principally a hotel company within the Thomas Cook Group.

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Jamie David William Rollo, Morgan Stanley, Research Division - MD [9]

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Just to clarify on the second question, just to understand. So, if the airline is not sold eventually, whether because the company decides not to or the bids are too low, are you saying you could get the GBP 300 million facility under that scenario?

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [10]

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The facility is still available, yes.

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Alex Brignall, Redburn (Europe) Limited, Research Division - Research Analyst [11]

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It's Alex Brignall from Redburn. A couple of questions. I guess, on the tour operator, clearly, very significant pressure this year and the gearing on that is material. In terms of your expectations on how that plays into next year and what long-term expectations you have on those tour op margins, I guess it comes back to Jamie's question on the remainco, but how you could separate out the trading -- the difficult trading environment now versus structural components within that, that would be very helpful. On the airline, and at the risk of asking a question that you'd just say, we can't say anything, is there anything that you can say on time frame or versus your previous expectations on the nature of the bid and maybe against some of the concerns people have had about the ability to integrate an externally owned airline with a tour operator that uses a lot of that airline capacity and how have people responded to the challenges of that? And then, the third question, I guess is on net debt and working capital. There is no guidance that I saw for the full year on net debt, and also in terms of working capital. Are there anything -- changes that have happened anticipated in terms of, I guess, on the payables side, your hotel relationships, is there anything that you're seeing there, any challenges, that would be great.

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [12]

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Okay. I take the first 2 and then, Sten, the third one. Tour operate -- yes, we are operating in a really challenging environment. So, that is, in the tour operator business is a fact and you see that in the market as well. The long-term aspiration for the tour operator remains the same. And the more we can grow into the hotel business, the better is going to be the margin. And the hotel business is then as well somehow -- a step of integration like the airline is as of today, but the hotel business can as well be a step of integration into the value chain where we gain more margins than in the tour operator, where we are principally just a service provider. And that is exactly the ambition where we want to go, that we are building up a hotel business to partly, in a new world, partly replacing as well an asset heavy business like the airline. So the aspiration and -- I'm often asked, is this structural or is it cyclical. It is, in my view, definitely not structural because all what we get from our customers is that they'll love to go with the tour operator if and when you have the right products. But it is cyclical, but the cycle is not just bouncing back within 12 months. The aspiration -- the long-term aspiration still stays the same. It has to have a margin dependent then how much assets you add on the hotel side and how you are dealing with that between 3% and 4% as a trading business. Then the airline bids. Look, we have a healthy level of interest and these are credible bidders, which are coming in. And we are in this process. We are extremely transparent with how we are dealing between the tour operator and the airline. And since the separation of the airline and the tour operator, and building principally 2 separate businesses 2 years ago, in our daily life, we are executing this sales and purchase -- not sales and purchase agreement -- this sales and commercial agreement with the tour operator and the airline. We are living that in our daily life. And it works well and it reflects market conditions. So, so in a possible future world, that is going to exist. Of course, the airline needs a strong partner. And of course, the tour operator needs a strong partner, but as I repeatedly said, we don't need that on the balance sheet. So all the bidders are fully aware of how we are dealing with it and are fully aware as well of the potential, which the airline still has and it is a good airline. It is really a good airline and we are proud of what Christoph and his team have achieved.

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [13]

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We have people on the phone, so maybe--

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Alex Brignall, Redburn (Europe) Limited, Research Division - Research Analyst [14]

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Sorry. I guess as a follow-up to that answer on the airline, are all of the bids that you're considering making bids effectively based on we're going to take on this airline business that runs like this with this massive partnership with Thomas Cook and therefore we're bidding to keep it going as it currently does versus bidders that might say, I like those slots that you have in this airport and that's what I'm going to bid for and then effectively take and turn something else?

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [15]

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Yes. The second, no. okay? Mark?

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [16]

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Sorry. There was -- you had one more -- you had one more question--

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [17]

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Sorry, sorry.

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [18]

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On the net debt, we have previously -- when we talked about how we saw this year guided on a higher double digit free cash flow for the year, you were seeing the figures -- you were seeing the figures for the first half, and I would not expect and I would not put in my model for this year a positive free cash flow. The cash flow for the second half is of course very much dependent on how the remaining part of our still-to-sell business is sold and what type of cash that would generate. So if I was doing my spreadsheet, I would probably pass on the net debt duration that you see at half year for full year, but with the variance off -- a business picks up a bit, yes, then it looks -- then it looks better. But at the end of the year, we have less hotel payables in our books because of the -- of the business situation. So there is of course also no supporting working capital at the end of the year. So that's as much as I can guide on that one at this point in time. You asked -- you asked on the hoteliers, how they react on the situation. That's how it was really your question. I think it's fair to remember that most of the people that we work with have been partners of Thomas Cook or any predecessor companies for the last 30 years. Peter has been in the business for 30 years in most. He owns -- he knows most of the owners. But unfortunately, he doesn't know he should've started a long time ago, but that's too late. He knows most of the hotel partners personally. So, yes, of course, they are raising questions. I think that's fair to say. They see where our bonds are trading. They see where our CDS are trading and things like that. But we have a very healthy relationship with our hoteliers and that has not had any negative impact on our business and on our finances.

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Mark Paul Irvine-Fortescue, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [19]

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Mark Irvine-Fortescue from Stifel. Just 2 things, please. Firstly, has the strategic review flushed out any interest for the business, the group as a whole or the remainco? And secondly, just on pensions, on a sort of breakout basis, can you give us a feel for where those pension obligation sits between airline and the tour operator and maybe even different regions within that on a breakup?

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [20]

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On your first question, Mark, we are focusing on the strategic review of the airline. And as a public company, we are well aware of our obligations. If there is something to say, we have to say, then we are going to say it, and you are the first one who are going to know that. On the second question, Sten?

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [21]

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Yeah, I can take that. The pension situation is so that in the U.K., based on the evaluation principles we have to use, the U.K. pension scheme is [over] funded at this point in time. We have an agreement in place with the trustees. It is also reflected in our last year reporting on the cash flow. We have a scheme in place with a certain payment over the next 3 years which will lead to the whole pension liability taken out of the company and placed separately, so we are out of that obligation mid-term. That all stays in place. It's not impacted by any financial discussions or any bank credits. The open, if you will call it like that, or the unfunded pension liabilities, are mainly in Germany. They are in the -- in the Condor airline and to a smaller extent in the German tour operator. They are balance sheet items unfunded and costs are funded out of the running EBIT. And we have no plans to change that. It is within the German regulatory system.

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Stuart John Gordon, Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst and Head of Business Services, Leisure & Transport, [22]

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Stuart Gordon from Berenberg. Three questions. I saw a recent interview where you acknowledged interest costs are too high and you're clearly confident on the airline review. But have you opened discussions with your bondholders in case you don't get the outcome that you are looking for from this strategic review? Secondly, there's been quite a big drop in commercial paper use, something that you've used quite a bit in the past. Is that because that market is now closed to you? And finally, can you just confirm what is outstanding under your bonding facility, which I think is excluded from the net debt number that you gave? Thanks.

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [23]

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Your first question, interest, I give to Sten. No, we have not opened discussions with our bondholders.

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [24]

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On the -- sorry, what was the -- you had 3 questions. What was the second one?

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Stuart John Gordon, Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst and Head of Business Services, Leisure & Transport, [25]

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CP.

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [26]

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Oh, commercial paper. As you have all noticed, there has been downgrades by the rating agencies in our credit rating. That, of course, has an impact on the availability of commercial paper. We are still trading commercial paper but to a smaller extent than in the past and maturities are shorter than they would have been in the past. But it is in addition to our funding capabilities. But it is not -- there is no mandatory use of commercial paper in our financial planning.

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Stuart John Gordon, Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst and Head of Business Services, Leisure & Transport, [27]

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The bonding facility. Outstanding--

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [28]

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The facility that we have with the banks is right. It has GBP 225 million -- GBP 225 million bonding component that is fully utilized for bonding and is not part of the net debt.

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Cristian Nedelcu, UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst [29]

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This is Cristian Nedelcu from UBS. Three questions, if I may, please. Firstly, in terms of the airline process, what time line do you give yourself or what time line do you expect to actually have some clarity on what is happening with all these bids that you received? Secondly, I guess, have you received interest from anybody for both the Nordics airlines together with the tour operator business there? Would that be something that you would be willing to consider is quite a valuable part of the business? And equally so, I would argue, if in a scenario where, let's say, the German airline is being sold, would you -- is it very important for you to maintain the German tour operator business in-house or considering the fragmented market there, there could be a possibility to consider that? The last question, I guess, on the discussions with the civil aviation authority. Could you tell us if you've had recently or you're currently having any discussions with them regarding the possibility to increase the cash deposits or increase the bonding that they require related to your [other] licenses? Yeah, those are the--

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [30]

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Would you take the first one? I'll take the last one.

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [31]

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So, what is the process. We are assessing now the bids and are, of course, considering all options in this strategic review of the airline, and we are really committed to make the best out of it for our shareholders and for all our stakeholders. As I said before, that is our main target, that is our focus what we are going to do. And if there is anything else what we have to communicate, we are going to communicate. And I am not going to speculate here and then put it -- go into the rumors what we have had during Essen -- that is absolutely a no-go and no-comment from my side. We said that we consider as well to sell parts of the airline. It is just a matter of where do we get best out of it and the best value out of it. And that could of course be that we are selling Condor as a part, but that's nothing to do with what we are going to do with the tour operator. So that is really the strategic focus is review of the airline. CAA, do you want to take that?

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [32]

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Yeah. Maybe just one more comment on the second one to Peter. I think it's a very simple formula. Result of the airline review has priority over time. So that's why we take the time it takes to get the right result of the strategic review. The CAA is of course a very important authority. They are mandatory to our U.K. business. The company has always kept a very open and transparent relationship with them. I have made sure to continue that after I joined the company in October last year, so we are on a -- let's call it, a full information exchange with the CAA. They know exactly where we stand. Peter has his own regular connections on -- on top level with the CAA. So we are, I would say, in a comfortable place with the CAA, and I would put it like there we have no stress whatsoever.

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [33]

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It's Kathryn from Numis Securities. Just 3, if that's okay, please. Firstly, just in terms of the market conditions we're seeing generally and obviously, your guidance this morning for the second half, things have deteriorated, which reflects the backdrop. In the event that we were to see further worsening in the backdrop and clearly the strategic review on the sale of the airline, and you've just said you're patient and you're going to wait for the right result. So in terms of any need of further liquidity, how do you feel your banks are going to go -- where can that go? You've just -- you've got terms for GBP 300 million. Could that extend further? Secondly, just in terms of the airline sector, generally, I mean, as you mentioned, again, that sector is also under a lot of pressure, and airline profitability in Europe has obviously been under pressure significantly. Has your expectations for the bid or the gross proceeds perhaps changed during the last 6 months as that industry has worsened? And then thirdly, are you able to give any detail on the banking facility, the GBP 300 million terms, in terms of the cost of that? If you were to have to do draw on that, what that might cost you guys?

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [34]

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Okay. I'll take the number 2 and Sten, 1 and 3, okay? You say the airline sector is under pressure, and I'll give you the answer. The airline sector is in a phase where there is consolidation going to happen. It is the most normal thing in that and we see examples of which where we saw that happening in the US. So you can say that is a bad time or you could even say that is pretty good time because we have an attractive airline, which could be part of this consolidation. And our airline is profitable and our airline has a great management and has a good customer base and has a valuable (inaudible) in the whole -- in the big airports in Germany and in Scandinavia and in U.K. And I don't speculate on any outcome of the proceeds. You would not expect anything else from me.

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Sten Daugaard, Thomas Cook Group plc - Group CFO & Executive Director [35]

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I might add to that that remember that the airline is still a -- now Christophe is here. I shouldn't say good performer. A reasonable performer because he needs to do more. It's still performing according to where we expect it to perform, and that of course is also reflecting in what we are seeing coming in. I don't think you can say that there is a general reflection in what we are seeing on the offer side that takes the deterioration of business in that way into account. My personal feeling is that I am positively surprised about what we see and there is something to build on. But that's as far as we can say at this point in time. Of course, I have not asked for the discussion with the banks on an additional facility based on the forecast that we are giving here. We have of course worked on a -- let's call it, an absolute worst case for where the business could go when everything goes wrong, and based on that, we have built the ask for an additional facility. And as we do not expect the worst case, then I do also not foresee and expect that I need to go back and ask for a higher credit line.

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [36]

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Okay. One follow-up, if I may. Just in terms of the guidance for full year, obviously you've said that you expect a lower year-on-year EBIT for the second half. Are you able to give us any kind of context on what you're seeing now or the run rate is now? Obviously, we're a third of the way through the second half. In terms of pricing, you've disclosed it's up 2% so far 59% sold -- what is pricing today on average for what's been sold in the last 2 months of the season? And what margins are doing so far? Obviously, things might improve. But can you just help us get a stick in the ground?

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Peter Fankhauser, Thomas Cook Group plc - CEO & Executive Director [37]

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Look, we are not going to do the same mistake as last year where we had 3 months in front and we had a really difficult market and we didn't know exactly how it plays out. I don't know how it plays out with the capacity, which is left.

That is -- we made different scenarios and we said, okay, with all what we know at a certain point in time we have to say we come behind last year. That is all what we are going to say today, and then give us time to really build up and trust as we are going to do the best we can.

Okay. No more questions, then. Thank you very much for coming. Thank you very much for your interest. Wish you a good day.